2015 (12) TMI 1550 - AT - Income Tax

Disallowance of depreciation in respect of RoU Crop compensation - Held that - The facts of the case under appeal are exactly similar to the facts discussed in assessee s own case by the co-ordinate bench and applying the same ratio, we are of the considered view that depreciation should be allowed on the cost of compensation paid for damage of crop to the land owner. Disallowance out of capital work in progress - Held that - No specific defect has been pointed out by the Assessing Officer in the books of accounts of assessee maintained as well as details of capital expenditure incurred for the capital work in progress incurred to projects not completed upto the end of the year and also did not controvert to the suo moto allocation by the assessee of certain revenue expenditure which relates to the project under process. However, looking to the size of business of the assessee as well as impossibility of bifurcation of each and every expenditure falling under various heads and also looking to the figure of capital work in progress for the year under appeal at ₹ 588.97 crores vis- -vis total revenue of the assessee at ₹ 447.27 crores, in order to meet the ends of justice we deem it proper to sustain disallowance @ 1% of total employee cost of the company at ₹ 7,63,31,420/- and 1% of administrative and other expenses of ₹ 4,71,50,100/- and accordingly the sustained disallowance will arrive at ₹ 12,35,815/-. Thus in view of the above, ground of appeal raised by Revenue is rejected and that of assessee is partly allowed. Disallowance u/s 14A - determination of amount of expenditure in relation to income not includible in the total income as referred under Rule-8D read with section 14A of the Act - Held that - There is no exempt income during the year, we are of the view that ld. CIT(A) was not justified in partly allowing this addition made by Assessing Officer and set aside the orders of lower authorities and allow this ground of assessee by restricting the disallowance of ₹ 2,87,511/- u/s 14A of the Act which has been accepted by the assessee in its return of income.

Summary

Issues Involved:
1. Disallowance of depreciation on RoU (crop compensation), RoU (related to land users), and ROW payments.
2. Disallowance of expenditure directly attributable to capital work-in-progress.
3. Disallowance under section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on RoU (Crop Compensation), RoU (Related to Land Users), and ROW Payments:

The assessee, engaged in laying pipelines for natural gas transportation, claimed depreciation on costs incurred for crop compensation, RoU, and ROW payments, treating them as part of the pipeline cost. The Assessing Officer disallowed these claims, arguing that the underlying asset is land, which is not depreciable. The CIT(A) allowed depreciation on crop compensation but upheld the disallowance for RoU and ROW payments. The Tribunal, referencing a similar case (ITA No.3222/Ahd/2009), found that crop compensation should be added to the cost of the pipeline, not land, and allowed depreciation of Rs. 5,25,65,289/-. The Tribunal dismissed the Revenue's appeal on this ground.

2. Disallowance of Expenditure Directly Attributable to Capital Work-in-Progress:

The Assessing Officer disallowed 10% of employee costs and administrative expenses, attributing them to capital work-in-progress, amounting to Rs. 1,23,48,152/-. The CIT(A) reduced this disallowance to 5%, citing the need for an estimate due to the large scale of the assessee's projects and the difficulty in precisely bifurcating expenses. The Tribunal further reduced the disallowance to 1% of employee costs and administrative expenses, totaling Rs. 12,35,815/-, considering the detailed bifurcation provided by the assessee and the lack of specific defects pointed out by the Assessing Officer.

3. Disallowance under Section 14A:

The Assessing Officer disallowed Rs. 1,53,13,165/- under section 14A, applying Rule 8D, despite the assessee's acceptance of Rs. 2,87,511/- as disallowable. The CIT(A) modified the calculation but upheld the disallowance. The Tribunal, noting that the assessee had sufficient non-interest-bearing funds and no exempt income was earned during the year, referenced the Gujarat High Court decision in CIT vs. Corrtech Energy P. Ltd. (2015) 372 ITR 97 (Guj), which held that section 14A does not apply if no exempt income is earned. Consequently, the Tribunal restricted the disallowance to Rs. 2,87,511/- as accepted by the assessee.

Conclusion:

The Tribunal partly allowed both the Revenue's and the assessee's appeals, providing relief on the grounds of depreciation on crop compensation and reducing the disallowance for capital work-in-progress and section 14A to the amounts accepted by the assessee. The order was pronounced on 7/12/2015.